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Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

Gough Industries, Inc. v. Rothman . . . (1971)

Tax Claims in Arrangement Proceeding

The Board sought to collect postpetition interest and pre- and postpetition penalties for late payment of sales tax from petitioner, who had reorganized pursuant to a plan of arrangement filed under Chapter XI of the Bankruptcy Act. Petitioner took the position that under the plan the interest and penalties were the obligation of the debtor estate; that certain postpetition sales tax credits resulting from the writeoff of bad debts were properly the property of petitioner, not the estate; and that postpetition penalties and interest were the obligation of the estate, in any regard, since the receiver was dilatory in paying the underlying obligations.

The court upheld the finding of the referee that the amounts in question were the obligation of the petitioner. The court held that the plan of arrangement did not purport to allow payment of the obligations in question; that under the Bankruptcy Act allowances for prearrangement penalties and postpetition interest are precluded, as are allowances for postpetition penalties in instances where the penalties cannot be prevented without payment of prepetition penalties; and that the instant obligations were not classed as expenses of the administration under the plan.

The court further held that the right to the tax credits properly passed with the underlying receivables, which passed under the plan of arrangement to the estate, since under Revenue and Taxation Code Section 6901, the credits were payable to the person who paid the excess tax amount. The receiver was not liable for the postpetition penalty and interest due to his failure to pay the tax promptly, since he could not legally pay the postpetition penalty in any regard and since the record did not clearly indicate that the receiver's delay was due to factors other than those inherent in bankruptcy proceedings. Gough Industries, Inc. v.Rothman (9th Cir. 1971) 446 F.2d 536, cert. den. (1972) 405 U.S. 916.

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